IRA Definitions
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Before investing in an Individual Retirement Account, it’s important to understand the terminology. If you don’t, you could lose money in penalties and unnecessary taxes.
Investments in IRA accounts are called contributions. It’s important to keep a record of when your contributions were made and if they were before or after taxes. With some types of IRA’s you receive a tax deduction for the year the funds were contributed. Depending upon the type of IRA, the earnings and gains from contributions accumulate tax-free until the money is withdrawn.
Money withdrawn from an IRA account is known as a distribution. Most distributions are taxable, in the year they were received. The rules governing distributions are complicated. Ask questions and make sure you understand the consequences before taking money from an IRA.
IRA accounts were established to assist individuals in saving for retirement. Therefore, withdrawals before the age of 59 ½ (Premature Distribution) are strongly discouraged and subject to a 10% penalty charge. There are some exceptions, such as death of spouse or terminal illness. Professional advice should be obtained before making any withdrawal.
The government wants to make sure you withdraw your money after the age of 59 ½ so they can collect the taxes due. Usually you have to start making withdrawals no later than April 1st of the calendar year following the date you turn 70 ½.
The IRS rules governing withdrawals are very complex. For example, the penalty for withdrawing the wrong amount can be as high as 50% of the shortfall between what you should have withdrawn and the amount you actually withdrew.
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